I have a pension which makes me a 40% tax payer. I also have a one-man company. I am 52. To get a full State pension I could pay Volutary NICs of Â£6.85pw (Â£356pa). Alternatively, I could pay myself a salary of, say, Â£4000pa from my company: Â£4000 falls between the NIC Lower Eearnings Limit and the NIC Earnings Threshold so Employer's and Employee's NICs are payable at 0% - i.e. no NICs are payable BUT I would be deemed to have paid NICs and thus the year would be a qualifying one for State pension purposes, and I would not need to pay the Â£356 Voluntary NIC. (AM I CORRECT SO FAR???)

40% income tax on Â£4000 salary (Â£1600) would be payable but the Â£356 Voluntary NICs would be saved making the effective tax Â£1600-Â£356 (Â£1244). Â£1244 is 31% of Â£4000, so I'd pay an effective tax rate of 31% on the Â£4000 salary. (YES?) (And would the IR chip in something to my personal Stakeholder Pension?)

The company will have profits under Â£10K so no Corporation Tax will be payable. If I took Â£4000 as a dividend I think the tax rate is 32.5%?
So taking the Â£4000 as salary or dividends makes little difference tax-wise. (Or would there be a deemed tax credit of 10% with the dividend which would make the actual tax on the dividend 22.5%???)

I've been told that the Revenue take a dim view if you pay yourself no salary and take money out only as dividends (is this true?): the above approach would seem to enable me to take some salary at about the same tax rate as a dividend.

You are right in your thoughts about protecting your basic pension entitlement by taking a salary that attracts no NIC.

By taking dividends it comes cheaper as dividends that fall within the higher income tax bracket are taxed at 22.5%.

Regarding the Revenue's attitude towards taking dividends instead of salary, it is irrelevant if you are a director and you have no explicit contract of employment with your company. Tough luck for the taxman! He has agreed that those directors do not fall within the Minimum National Wage legislation as long as...

I hope this helps.

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